Microsoft Extends Overture Deal to 2006

Microsoft and Yahoo agreed to a one-year extension of MSN's deal to show Overture Services' paid listings on its Web sites.

The deal extends through June 2006 a partnership that was to expire in June 2005. Overture will continue to act as the exclusive third-party provider of search ads on MSN sites in the United States, Canada, Europe and Asia. Microsoft sells some of its own search listings directly to advertisers on an impression basis, though Overture provides the majority of paid search results, which are pay-per-click listings.

The extension means Microsoft and Yahoo will stay search partners at least another 18 months. Microsoft has made search a priority after letting Google and Yahoo dominate the market.

Microsoft last week introduced a test version of its search engine, which will replace Yahoo's search technology. The company has not said whether it eventually will build its own paid search platform to replace Overture.

Search industry analysts predict Microsoft's commitment to building a search engine -- it has spent $100 million already on the effort -- will naturally lead it to replace Overture with a paid listings system of its own. Spending on search advertising reached $1.8 billion in the first half of 2004, according to the Interactive Advertising Bureau.

Jupiter Research analyst Nate Elliott said he expects MSN will slowly build its own paid search program and mix it with Overture's listings while it ramps up.

"This way, they can slowly throttle up their own system, which will minimize disruptions, and they've still got Overture to fall back on should anything go wrong," he said.

Microsoft's development of its own paid search platform would give search marketers a third high-volume option for paid search campaigns. MSN drew 14.4 percent of all Internet searches in August, according to comScore Networks. Google received 36.1 percent of searches and Yahoo 30.6 percent.

"It's definitely going to be the third tier," said Matt Naeger, vice president at Impaqt, Pittsburgh, a search marketing firm. "It's still significant but in no way makes it comparable to Google."

The search market's development has been aided by the presence of two major players, he said, because a marketer could run campaigns on Google and Overture and reach 95 percent of the market.

"The biggest question is how well Microsoft is going to do at gathering the search traffic," he said. "Advertisers are still going to go where the search traffic is."

Overture and MSN have partnered for paid search since 2001. Neither Microsoft nor Overture report how much revenue the deal generates. But Microsoft has credited search with playing a big role in helping MSN record three straight profitable quarters after losing money its first eight years. In the past year, MSN's ad revenue has grown 43 percent. The company anticipates its search advancements will contribute further sales.

"We will catch up, we will surpass, and that will allow us to drive growth in our advertising revenues," Microsoft CEO Steve Ballmer said at the company's analyst day meeting this month.

After Yahoo bought Overture in July 2003, it was thought in danger of losing many of Overture's distribution partners, particularly Yahoo portal rival MSN. At the time, Yahoo CEO Terry Semel said the logic of the deal did not hinge on Overture maintaining its entire distribution network, though the company would strive to do so.

Yahoo has kept Overture's distribution network mostly intact. It renewed the MSN arrangement in October 2003 for six months. However, some portal partners were unhappy relying on a Yahoo subsidiary for advertising. Lycos in the United States and T-Online in Germany separately dropped Overture last fall, each citing Yahoo's ownership of Overture as a reason. Lycos filed suit against Overture in the matter, claiming Overture breached its contract by linking with a Lycos competitor.

"We've been successful in maintaining our portal relationships and adding additional ones," said Gaude Paez, an Overture spokeswoman. Since the Yahoo deal, Overture has struck paid search agreements with South Korean portals Nate and Naver as well as extending its deals with Wanadoo in Europe and Web.de in Germany.

MSN already has taken steps to remake the advertising portion of its search service. In July, MSN overhauled its search results page to better clarify which listings are ads. It eliminated paid inclusion, which lets Web sites pay to have their sites included in search indexes. MSN eliminated the "featured sites" layer of search results that mixed non-paid results chosen by MSN editors with Web pages that were included for a fee. The facelift also moved non-paid Web search results toward the top of the results page.

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